Lots, leverage and margin are all pretty boring subjects. One exception to this rule is traders from the U. Spread betting usually works differently. In the previous article you learned what a pip is and how to calculate the value of a pip. To open a trade, you need to buy or sell one or more lots. Nano and micro lots are a fantastic way to trade Forex without risking much money.
When you first start trading, you do not want to be trading standard lots. Micro lots allow you to learn Forex without risking the house. Now you can calculate the value of a pip per lot. The pip value we calculated in the previous article was based on a single unit. Calculating how much you will make per pip on a trade is straight forward. If the US dollar is not quoted first and you want the pip value in US dollars, the formula is a little different.
Leverage allows you to trade more units than you have. In this case, you would have The important thing to remember about leverage is that it does not affect the value of a lot.
You know that a mini-lot is 10, units of currency and a standard lot is , units. The value of these never changes no matter what your leverage is. If you have Leverage does not affect the value of a lot but has an effect on the number of lots you can have in the market, based on the capital in your account. The reason they call it leverage is because it is much like trying to lift a very heavy object. Some objects are just too heavy to lift. Leverage may sound great, but it can cause problems too.
The higher your leverage the more of your capital you can risk at one time, in comparison to a lower leverage. The trader with Trader 1 takes a long position at Trader 2 takes the same long position at Since Trader 1 has Since Trader 2 has Leverage be extremely dangerous. You need to be very careful with leverage. In the end though, you are the one that determines the degree of your leverage. Your broker can only determine the maximum leverage allowed. If you choose to use the maximum that is up to you.
Margin is a good faith deposit required by your Forex broker to cover the position you have entered into the market. Without providing this margin, you would be unable to use leverage as this is what your broker uses to maintain your position, and to cover any potential losses.
Different brokers will insist on different levels of margin depending on a number of factors such as the currency pair you are trading and the leverage of your account. The currency pair you are trading is a factor in how much margin is required because each currency pair moves different.
This means the margin required to trade those currencies is likely to be higher. Also since margin is normally quoted in percentage terms, such as 0. The easiest way to think of margin is that it is the 1 in the leverage ratio.
So for instance, if your leverage is This will dictate how much you can place in the Forex market. A margin call is what happens when you have no money left in your account. To protect you from losing more money than you have your broker closes out your positions. This means you can never lose more money than you have in your account.
The amount of money in your account that is currently used in open trades. The amount of money in your account minus any open trades. We will continue from the same examples used above. With good money management this should never happen but newbies can slip up. Tom curses himself for taking a long but he keeps the position open. If Tom keeps the position open and it moves too far against him he will get a margin call.
This protects Tom from losing more money than he has in his account. Margin calls are easily avoided if you trade sensibly. However, this is more advanced stuff that you will learn later in the free Forex course.
It is very important that you check what the margin polices are with your broker. Margin policies can differ from broker to broker so if you plan to open an account remember to ask.
What is a lot in forex? However, there are several different lot sizes in Forex: Calculate the per unit value of a pip.More...